On a simple level, job costing is a management control process of tracking and categorizing each cost incurred in business. The costs are typically associated with a specific job or project and then further categorized by labor, materials, subcontracts, and equipment costs. In many job costing systems, the costs are also associated with tasks on a job or the types of work completed. Predominately used in construction, job costing methods are also used in the motion picture and shipping industries, in fabrication, repair, and maintenance works, and in services such as auditing.
However, for many smaller and mid-size companies, job costing isn’t so simple. In fact, it’s an Achilles’ heel when it comes to determining profitability. Proper job costing requires projecting and determining the true economic costs of a specific job, task, or project. But the process can be a challenge to employ for a variety of reasons, including the following:
- Difficult to establish
- Requires a solid budget process
- Requires some meaningful cutoff procedures, whether it be monthly or quarterly
- Requires an understanding of the true components of the products and services
- Costs need to be captured on the “floor”
- Requires further segregation, not only by the company but also by the specific jobs and tasks
- Requires a true, proactive means of Continuous Improvement
In addition, too often a “random” allocation is calculated to a job. This process may generate an accurate picture for the project as a whole. But it does not reflect the true costs of individual tasks. Therefore, the entity may have some tasks that actually are losing money and others doing very well without any evidence as to which are which.
Another flawed approach to job costing involves the automation process. Most accounting software solutions address job costing in a very structured and accurate manner. However, the end user corrupts the data input and flow to accommodate an internal deficiency. This is evident by the number of superfluous spreadsheets or secondary repositories of data and calculations in organizations.
How Can Your Company Overcome These Issues?
Companies should consider industry specific accounting systems that offer extensive reporting capabilities. These systems are usually designed to handle millions of records and are built on secure databases. As a result, more time can be spent analyzing data and less time gathering it.
Additionally, to ensure expenses don’t slip through the cracks and remain unassigned to specific jobs, it’s important to set up a simple coding system. Cost codes are used for each phase, allowing “mini-budgets” to be generated and tracked. In the construction industry, for instance, the Construction Specifications Institute (CSI) has established an industry standard cost coding system.
The bottom line is that when done properly, job costing can be a great tool. Not only can it help your business determine the profit and loss of projects, but it also serves as the foundation for Continuous Improvement, further strengthening your bottom line.